After what was initially a rather low-key announcement back in March, the FCA has already revised its proposed changes to the limitations system in place for full permission credit brokerage firms with debt permissions. In practical terms these changes could significantly affect dealers, who should review whether the changes affect them and contact the regulator about amending their permissions, if required, write Locke Lord’s Jo Davis and Timothy Anson
When applying for authorisation and permission from the FCA to engage in regulated activity, most dealers would typically have applied additionally for permission to engage in the activities of Debt Adjusting and Debt Counselling. These permissions are typically required if a firm intends to reschedule a customer’s existing debts as part of a new finance agreement. Lenders that reschedule a customer’s existing debts with a separate lender would also typically be required to hold these permissions.
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During the 2014-2016 application process, the FCA gave firms applying for permission to engage in Debt Adjusting the option of applying for a limitation on the permission that limited them to debt adjusting with no debt management. This limitation reflected what most firms understood to be the accepted position; principally that debt management was an activity engaged in by firms assisting a customer in financial difficulties with restructuring their debt. The 2014-16 limitation was in place to restrict firms that were solely engaging in the rescheduling of an existing debt under a new agreement from being able to hold client money in the same way that a pure debt management firm can.
Over the course of the 2014-16 process the FCA appears to have revised how it applies the term ‘debt management’. Throughout this has meant:
“the activities of debt counselling or debt adjusting, alone or together, carried on with a view to an individual entering into a particular debt solution or in relation to any such debt solution, and activities connected with those activities.”
During 2016 however, and culminating in the FCA’s recent announcements, the FCA’s application of the definition has been expanded so that the term ‘debt solution’ now appears to include circumstances where:
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By GlobalData- a credit broker assists a customer in rescheduling an existing debt under a new agreement; or
- as part of a new finance agreement, a funder reschedules an existing debt due to a different funder.
As a result of this repositioned approach on ‘debt solutions’, new debt limitations are now in place. These limitations were first announced in March, and then subsequently revised almost immediately, in April. For firms this means reviewing their activities and deciding whether their current permissions require one of the new limitations to be added. The new limitations are:
- For firms involved in asset finance with permission for either Debt Adjusting or Debt Counselling, limited to the sale of goods – this permission is limited to firms that are engaging in debt adjusting and/or debt counselling that is provided in connection with the whole or partial settlement of credit agreements in relation to the sale of goods.
- For firms involved in vehicle finance, limited to the settlement of vehicle finance – this permission is limited to firms that are engaging in debt adjusting and/or debt counselling that is provided in connection with the whole or partial settlement of credit agreements for vehicle finance.
- For firms not involved in asset or vehicle finance, limited to no debt management plans – this is a generic limitation is for firms engaging in debt adjusting and/or debt counseling that are not providing debt management plans and are not covered by either of the other two limitations.
If one of the new limitations is applicable, firms that already have permission to engage in debt adjusting and/or debt counselling can change the relevant limitation by emailing the FCA. A full variation of permission will not be required, and the FCA has advised that there will be no charge for this alteration to the firm’s permission.
If these changes result in a firm being categorised as a ‘debt management firm’, additional requirements may however also apply. The most significant of these concerns approved persons, as a debt management firm requires a CF10 (Compliance Oversight Function) approved person to be appointed. Firms should therefore seek guidance as to whether this is necessary and the steps required to effect such a requirement.
Our understanding is that the FCA will permit a period of regulatory forbearance to allow firms to assess whether they need to notify the FCA about any potential change in their limitations. Unfortunately, no guidance has been given by the regulator as to a reasonable timeframe for firms to conduct such an assessment. Firms should therefore address this question as soon as possible.
